This Week's Focus: Why did not the Fed raised rates in June?

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Friday, 17 of June 2016

This Week's Focus: Why did not the Fed raised rates in June?

The US Federal Reserve (Fed) kept interest rates unchanged at its meeting on 16 June. The main reason was the fear of a slowdown in improving US labor market, in view of data creation of non-agricultural employment in May. The objectives of the monetary policy of the Fed are full employment and price stability.

Radiography of the labor market in the US

The question to be asked is whether the Fed is successful in her fears about employment prospects in the US To answer this, we look at different data. First, the demographic evolution of the country and its population structure show a growing population and a stable aging. Thus, between 2006 and 2016, the percentage of working-age population (20 to 65 years) has remained stable, from 60.1% to 59.8% while the total population has grown by more than 23 million people.

However, the percentage of participation in the labor market, ie the number of people employed or seeking employment on the total population of working age, it has been reduced by about 4% from previous levels to the crisis. However, the maximum contribution was achieved for the first time in 2000 and since 1950 is on average 63%, while it is true that since the 1990s had remained above 66%.

The economic recovery was noticeable on the labor market

Following the sharp contraction of the labor market due to the financial crisis of 2008, the subsequent economic recovery allowed the US labor market a marked improvement. First, the applicants for unemployment benefits, following the sharp increase in 2009 (crisis, post-peak) to more than 6.5 million unemployed have been declining to stand at below pre-crisis levels, he has led the unemployment rate to fall below 5%, in what is considered full employment.

The quality of jobs created, based on the temporary contracts, has been good with creating more full-time jobs in relation to part-time. The jobs created since the crisis have been more than 12 million full-time and just over 3 million part time.

Similarly, youth unemployment has been reduced significantly also reaching similar to the pre-crisis time rates.

Rising labor costs, still without inflation

Another indicator that should support a rate hike that did not occur, is the evolution of labor costs, or in other words, the evolution of wages. When the labor market reaches high levels of employment, it is normal that wages increase because companies the best workers, attracting them with a better salary for a similar position dispute.

The evolution of labor costs indicates that the labor market in the US it is already at this stage, with higher wage growth to 4.5% annually and a clear upward trend since 2010. In the absence of inflation implies greater purchasing power of wages, with beneficial effects on consumption but involves lower corporate profits in the short term.

In conclusion, it seems that the American labor market this weakness, but rather the contrary a strength that gives envy from the point of view of the Spanish labor market, where both unemployment rates, overall and youth, such as job creation American far. Obviously are two very different labor markets inter alia by high protection to workers in the Spanish market compared to the US, but to the strength of the data would be good to reflect on what situation we prefer.